> The simplest approach for crypto exchanges to prevent bank runs would be to not lend out or trade with deposits.
Except the consumer is drawn to the crypto-exchanges with significant "staking" rewards. Like Crypto.com or FTX.
When you're promising free money, you can't just sit on the money. You gotta lend it out to generate those staking rewards.
Now maybe, just _maybe_, the lending out of customer deposits could be a tightly regulated activity. Maybe regulations upon the types of securities that you lend to (ie: to AAA rated corporates), as well as maturity (ex: 1-week expiration or daily expiration).
Oh wait, that's a Money Market Fund. Add on FDIC insurance and you're now at a federally regulated savings account.
> Except the consumer is drawn to the crypto-exchanges with significant "staking" rewards. Like Crypto.com or FTX.
Staking itself wouldn't be a problem. There would be some risk involved in case of technical problems (for example due to Slashing on Ethereum), but in overall that risk should be relatively small. Exchanges could still hold all of the coins, but just use some of the coins for staking (if users owning the coins opt-in to staking).
The problem occurs when exchanges lend out stored coins without the approval of the user: Either to lend them for shorting or to invest them into something that they assume would appreciate faster.
Staking is a problem because it pretends to offer risk-free returns while investing in extremely risky assets. Or just straight up fraud.
None of the staking schemes have adequately explained who's taking the other side of the trade. Who wants to borrow a token for a very high interest rate? So far the only examples are "people putting it into an even bigger fraud" and "people providing soon-to-be-worthless collateral".
We might be talking about two different things here when using the term "staking".
I'm referring to coins that are staked by validators in a proof-of-stake chain. The "other side of the trade" is not someone borrowing the coins, but are the transaction fees on the chain and for some chains also the artificial inflation (due to newly created coins).
There is risk involved, but not traditional counterparty risk (when excluding the exchange itself), as nobody is "borrowing" the coins.
1 VMFXX has been $1 for decades, never budging, never moving. The regulations and infrastructure to support such a thing already exists and have always existed to anyone who has any clue about banks / finances at all.
So why haven't stablecoins been designed to act like MMFs (like VMFXX) ?? Answer: because the cryptocoin community does not want a MMF. Its the only explanation. The cryptocoin community wants 6%, 10%, 18%+ returns on their "stablecoins". And its impossible to do that with MMFs.
> The cryptocoin community wants 6%, 10%, 18%+ returns on their "stablecoins".
As far as I know the two largest stablecoins (Tether and USDC) do not pay any interest. The interest that some exchanges pay on stablecoin balances is because they lend them out and/or use them as collateral. But that does not have anything to do with the stablecoin itself. If VMFXX was tokenized on the blockchain it would be used in exactly the same way.
> If VMFXX was tokenized on the blockchain it would be used in exactly the same way.
I'm going the opposite direction here.
If Tether / USDC really wished to "prove that they have liquidity reserves", they should go to the US Government and get the "Money Market Fund" / "Money Market Account" stamp of approval. And then invite the banking regulators to come in and count all their reserves.
I don't disagree here. My point was just that the interest that you see on exchanges is not directly related to the stablecoins.
I'm not sure if there are any legal or regulatory issues that would prevent stablecoins from getting those certifications. Tether definitely looks sketchy, but USDC has regular audits with public results.
Except the consumer is drawn to the crypto-exchanges with significant "staking" rewards. Like Crypto.com or FTX.
When you're promising free money, you can't just sit on the money. You gotta lend it out to generate those staking rewards.
Now maybe, just _maybe_, the lending out of customer deposits could be a tightly regulated activity. Maybe regulations upon the types of securities that you lend to (ie: to AAA rated corporates), as well as maturity (ex: 1-week expiration or daily expiration).
Oh wait, that's a Money Market Fund. Add on FDIC insurance and you're now at a federally regulated savings account.